Stopping payday lenders advertising won’t make the problem go away

Labour-run Plymouth council has sought measures to stop payday lending companies such as Wonga and The Money Shop from advertising on its billboards and bus stops – a move that will sit alongside agreements reached with city commercial partners to block adverts on the council's computer network, including in libraries.

Labour-run Plymouth council has sought measures to stop payday lending companies such as Wonga and The Money Shop from advertising on its billboards and bus stops – a move that will sit alongside agreements reached with city commercial partners to block adverts on the council’s computer network, including in libraries.

Other councils – Chester, Camden, and Haringey – have also blocked the websites of the 50 most popular companies offering high cost, short-term credit, but Plymouth is the first to make further bans offline.

These steps have been taken on the back of increased complaints about payday lenders in the city to debt advice centres, and it’s believed to be a step closer to making sure local people don’t get caught in a long term debt cycle.

Is the move enough?

The problem with the move is that it doesn’t make the problem go away. People will still end up in financial difficulty and can still visit the very many payday lending shops on their local high street.

A recent joint study by consultancy the Local Data Company (LDC) and Oxford University’s Saïd Business School, looking at 1,300 UK high streets between 2011 and 2013, found that payday lending shops have risen some 17 per cent over that period, completely changing the look of many high streets. One of the cities most affected is Plymouth, along with Croydon, Doncaster, Sheffield and Coventry.

On top of that it was found that the number of people in Plymouth moonlighting (taking on a second job) to pay the bills has increased 115 per cent in the last year. 15 per cent of those people, according to a poll carried out by online freelance marketplace PeoplePerHour, say their choice is between moonlighting or payday loans.

So, if the demand is there is the move by the council a good one?

It is certainly right that the council is taking action against payday lenders in the area, many of whom are under investigation by the Office of Fair Trading at the moment for widespread irresponsible lending and deleterious debt repayment methods. But the relative insignificance of the move shows how little power councils and elected councillors have over the areas they preside over. This needs to change.

The regulation that needs changing the most is the Town and Country Planning Act. Currently payday lenders are classed as financial institutions, as are banks and building societies. Under the act planning permission is not required to convert certain establishments such as restaurants in to payday lending shops, therefore councils cannot limit the amount of payday shops on their high street.

And this is the rub. Because payday lenders compete with each other on speed, namely how they can get money into bank accounts as quickly as possible, the more lenders there are on a high street the less chance they will properly credit check a borrower. This can lead to greater problems for people later down the line.

This is why a free-market argument against limiting payday shops would be ridiculous. Classical economics has already become nullified in this area of finance anyway since a proliferation of payday lenders does not drive down prices. Instead prices stay high and irresponsibility increases.

The council by targeting billboards, bus stops, and public-owned computers highlights the limits of their power, which needs to change. Typical market rules don’t understand fringe finance like payday lending and councillors are doing the best they can.

What else can councils do in the meantime?

It’s my view that if you cap the total cost of credit that a lender can charge a borrower for, and change the Town and Country Planning Act so high streets become more democratic and fitting to a community’s needs, then moves such as advertising blocks won’t be necessary. But the prospect of bad debt and a dangerous rise of expensive credit sellers needs to be challenged by credible, ethical alternatives as well.

A credit union is a cooperative financial institution where those who have a membership actually own a stake in the credit union. They offer credit at very competitive rates of interest, and usually offer other services such as debt advice.

While payday lenders can charge up to 400 percent on a loan, credit unions currently have an interest rate of 42.6 percent. What that means in pounds and pence is that while a payday lender can charge around £25-30 per loan of £100 over 28 days, a credit unions will charge about a pound.

Councils should work with credit unions to give them shop fronts, to make their visibility on the high street more known, like Citizens Advice centres at the moment. Once more people realise the benefits of credit union membership (which is at a sad 2 per cent of the UK population) then the risk of falling into a dangerous debt trap decreases.

As it happens Plymouth is served by three credit unions: City of Plymouth Credit Union, Fortress Credit Union, and HOPE (Plymouth) Credit Union. More visibility of these services, and less visibility of payday lenders, is no bad thing at all.

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